Efficient purchaser incentive when dealing with suppliers implementing continuous improvement plans


International Transactions in Operational Research

July 2014, vol. 21, n°4, pp.673-701

Departments: Information Systems and Operations Management, GREGHEC (CNRS)

Keywords: Continuous improvement, Dynamic programming, Purchaser incentives, Stochastic decision process

This paper presents incentive schemes in the framework of a collaborative purchasing cost reduction process with a supplier implementing a continuous improvement plan. Using a stochastic decision process formulation, we analyze the structure of the optimal policy and characterize its numerical robustness through numerical applications solved by dynamic programming. Then, we analyze two purchaser incentive schemes observed in practice. First, we describe some theoretical properties of the policies associated with these two schemes (schemes I and II) and show that these policies exhibit nonoptimal structures. Second, we estimate the quantitative loss for typical parameter values and, in particular, we show that for certain businesses this loss is significant. Then, we propose two easy-to-implement improvements (schemes III and IV), which result in near-optimal solutions and a significant impact on purchasing cost performances